A number of different institutions and government entities are responsible for regulating banks and deciding who receives a small business loan and who doesn’t. Such regulatory institutions also protect against fraud, theft and other forms of deception providing a measure of security among customers.
Yet with heavy handed regulation, banks are not given a whole lot of latitude in deciding who they can lend to and what the interest rate of such loans will be, according to BusinessWeek.com. They plug in an assessment formula, which involves a FICO credit score among other things, and make a decision to lend based largely on its results. Even neighborhood banks, which used to rely on relationships and other more subjective traits, are not able to provide lending with a handshake the way they could years ago. Some believe it is this overly regulated lending environment that has kept the nation in a flat economic cycle.
Many View Regulations as the Bane of Commercial Lending
For these reasons and more, companies have turned to less regulated avenues to obtain small business financing. Accounts receivable factoring is a way small businesses with flawed credit scores can get cash when they need it. Invoice factoring services will generally cost more than a small business loan. Factoring companies work with higher risk clients and provide more latitude concerning which companies they provide financing to. They regularly provide their services to companies that are turned down by banks.
Factoring Companies Rely on Self-Regulation
Similar to most alternative finance institutions, invoice factoring companies in the U.S. are not regulated by a formal government body. Most legitimate factoring companies are members of associations where they sort of self-regulate their collective and individual activities. The International Factoring Association and the Commercial Finance Association, for instance, encourage members to share best practices. They also provide training and tools to its members. A new association, Independent Factoring Standards Association, seeks to become “the only non-profit association to actively advocate for a more transparent, self-regulated industry where best practices are rewarded.” Its sentiment is that factoring companies should regulate themselves or else the government is going to do it instead.
According to FactoringGuru.com, no consensus exists among factoring companies and other alternative commercial finance companies regarding greater government or third-party regulation efforts. Some seem to support it by providing greater transparency while others seem to want as little government regulation as possible fearing it could negatively impact the business. As of this writing, invoice factoring services are not regulated in the same way banks are though the possibility exists that this could change.